FXstreet.com (Barcelona) - BofA Merrill Lynch analysts warn for risks of higher gasoline prices due to a tight corn market, at the lowest seasonal supply level since 2008: “The market could become even tighter if the corn ethanol mandate were waived in the face of the worst drought in 50 years threatening the corn harvest”, they wrote, adding that “40% of US corn consumption is made up of ethanol production and in turn 10%, or 850 k b/d, of all gasoline sold is ethanol”.
In the opinion of the analysts, the problem will require significant demand rationing by the USDA, already assuming a 10% cut-back in fuel ethanol production. However, it will only be possible to cut back on ethanol production when corn prices get “high enough to push ethanol producer margins into negative territory”. “If the corn yield gets revised down further, corn prices could rise to levels where the ethanol blending margin is zero (~$9.90/bu, up from $8/bu currently) and lead refiners and blenders to look for substitutes on a much larger scale”, they added.
In the opinion of the analysts, the problem will require significant demand rationing by the USDA, already assuming a 10% cut-back in fuel ethanol production. However, it will only be possible to cut back on ethanol production when corn prices get “high enough to push ethanol producer margins into negative territory”. “If the corn yield gets revised down further, corn prices could rise to levels where the ethanol blending margin is zero (~$9.90/bu, up from $8/bu currently) and lead refiners and blenders to look for substitutes on a much larger scale”, they added.
